Adjustable Rate Indices
We are often asked what the best ARM is and what the best index is. The answers to both questions vary depending on each person’s circumstances and preferences. Here are some general guidelines to help you with your decision.
1-Year Treasury Security (MTA)
The Treasury Security reflects the actual yield to investors, therefor it is almost always higher than the T-Bills. The Federal Reserve follows the resale of all treasury notes, bills, and bonds that are han-dled by the major brokerages and computes a “yield curve.” The Treasury Securities are then adjust-ed to a constant maturity of one year and from there to a “weekly yield curve” which is where the index figure is derived. Depending upon market conditions, this index can be very volatile.
LIBOR—London Interbank Offered Rate
London Interbank Offered Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International Financial Market. London is the center of the Euro market in terms of volume. The LIBOR is an international index that follows the world economic condition and allows international investors to match their cost of lending to their cost of funds.
The Prime Rate is the interest rate charged by banks for short-term loans to their most credit-worthy customers whose credit standing is so high that little risk to the lender is involved. The prime rate will usually rise and fall in conjunction with increases or decreases in the Federal Funds rate as determined by the Federal Research’s Board of Governors. Typically only Equity Lines of Credit are tied to this index.
Treasury Average Index (Constant Maturity Treasury—CMT)
The Monthly Treasury Average is the 12-month average of monthly yields of U.S. Treasury Securities adjusted to a constant maturity of 1 year. It is calculated by averaging the previous 12 monthly values of the 1-Year Constant Maturity Treasury.